Reagan & Regan pledge against '85 tax increase may be no idle promise
For months conventional wisdom has had it that the tax package passed this spring was only the down payment on major deficit reduction that would come in 1985. A major element of next year's package was presumed to be a tax increase. So common was the assumption, in fact, that Walter Mondale felt safe announcing that as president he would raise income taxes. So, he said, would Mr. Reagan.Skip to next paragraph
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Now we have an interesting situation in which the Democratic candidate, instead of putting the President in an embarrassing position, has instead positioned himself as the only candidate who assures the voters he will take back more of their income.
Is it actually possible that President Reagan and his Treasury secretary mean what they say - that they have no plan to raise taxes in 1985 or even in succeeding years? Looking at the evidence, it is indeed possible. Mr. Reagan doesn't act like a man who likes to raise taxes. He apparently still believes that government spending can be lowered, although most impartial observers don't think much more can be squeezed out of the civilian budget. And defense spending cuts await some arms agreement with the Soviets, and that is not just around the corner.
Economic growth is slowly shrinking the budget deficit, however - not nearly as quickly as the supply-side economists claimed it would - but it is going in the right direction. It was $195 billion in fiscal 1983. This year it will be around $175 billion, and possibly the administration is estimating a bit on the high side to give us some good news just before the election. Let's say it might come in at $170 billion.
Donald Regan told reporters last week that normal economic growth should make it possible to cut the deficit by $30 billion more next year - even with income-tax indexing going into effect. Let's suppose for a minute that the administration could avoid a recession through 1986 and the deficit would shrink another $30 billion that year. At that point, it would be approaching the $100 billion level. But by that time the annual pool of savings would also have grown , so that even a deficit of that size would be taking only 20 to 25 percent of the savings pool.
There is one major risk in this approach, and you have probably thought of it. If, at the end of a longer-than-average business expansion, there is still a recession? Here again one must challenge conventional thinking: We are used to the major recessions of 1974-75 and the early '80s. A normal business adjustment need not be that upsetting. Nevertheless, some risk certainly inheres in not worrying about how high the deficit could grow if it started from a not very modest $100 billion.
Looking at the conventional alternative - raising taxes next year - one can also find some risk. If there is genuine fear that the economy will lose its breath by late 1985, how is a tax increase going into effect at about the same time going to help it? And this includes all kind of non-income taxes being discussed - either a consumption tax or a valued-added tax, both of which would hit the consumer directly.
Most economists believe there is a link between the high deficit and high interest rates, a link Secretary Regan again denied last week. But there is also linkage between inflationary expectations and high interest rates, and he may be right that those expectations are about to come into play. This would take some of the inflation premium out of today's rates and relieve foreign pressure for a tax increase.
Does the President mean what he says? Given his long crusade against big government, is there any reason to think he does not? Moreover, given the prospect of raising taxes toward the end of this business cycle, a $100 billion-plus deficit may yet come to look like the best solution.